Which of the following happens in a 100-percent-reserve banking system?
A)Banks can create money by issuing currency.
B)Banks can create money by lending out reserves.
C)The Bank of Canada can increase the money supply with open market sales.
D)Banks hold as many reserves as they hold deposits.

Question

Quizplus · Accepted Answer

In a 100-percent-reserve banking system, banks are required to hold as many reserves as they hold deposits. This means that banks cannot create money by lending out reserves, as all deposits are fully backed by reserves. The Bank of Canada can still influence the money supply through open market sales, but this does not involve issuing currency or creating money through lending.

Which of the Following Happens in a 100-Percent-Reserve Banking System